A while back I got into an online argument with a couple of young economics students, defending Henry Hazlitt, Gene Callahan (who I've had the privilege of knowing through Dr. Ikeda) and even Donald Luskin, while the two extolled Keynes.
Well, Alex Tabarrok made a humorous but far more potent defense of Hazlitt
than I ever could. Not only that, he took Brad DeLong to task:
But the misreading is Brad's not Hazlitt's. Keynes is criticizing classical economics for focusing on the long run and this certainly includes the classical focus on savings as a key to economic growth. Hazlitt, as Brad notes, is restating classical economics so when Hazlitt points out the long-run problems with using spending to increase short-run aggregate demand, Keynes does, in effect, reply "We are all dead in the long run."
For some, it seems, one lesson is not enough. :)
Oof! Brad, did that hurt as much as it looked?
Dr. Tabarrok quoted what's possibly the single sentence where Keynes summed up his beliefs:
To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.
My problem with Keynes is the focus on aggregate demand. Even neo-Keynesianism, boiled down to one fundamental, is still about government stimulating aggregate demand. That produces so many dangerous implications. For example, Brad DeLong recently blogged
When can deficit spending in a recession help?
1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.
The first answer means a policy of social engineering, so that people think it's acceptable
for government to spend more to "cure" recessions -- that government ought to step in to help sustain employment. That leads to the second part, that people think it's necessary
for government to do that because private business can't do it.
My late father grew up during the Depression, and he later mistakenly praised the CCC and WPA for "putting people to work." Even if they created nothing at the end of the day, he said, "at least they were doing something." As Bastiat said, that is what is seen. What is not seen is that government borrows money which could have been lent to businesses. This is true crowding-out. Not the disproved notion that government borrowing will drive up interest rates, but that government borrows money to finance unprofitable things (for the sake of "employment" and sustaining "aggregate demand" though the government programs don't create new wealth), when businesses could have used that money to create real jobs and real wealth.
Perhaps government can borrow from foreigners, particularly those with excess savings? Even if the government programs produce no new wealth, the argument goes, at least we're creating employment. But the foreigners could have instead invested in our private sector, or they could have purchased our exports. Exports by definition have real value, and they require real jobs behind them -- not digging holes and filling them back up.
DeLong's second answer is based on modern liberalism's self-justification that government must do for people what they cannot do for themselves. Actually, FDR and his administration didn't even give business investment a chance to recover. With new regulations and incredible tax hikes (some marginal tax rates were 98%), FDR (and the Congresses that rubber-stamped his proposals) discouraged investment in worthwhile, profitable business. When the federal government under Hoover and FDR raised taxes and poured more and more money into public works, it was another time big government told people, "You wouldn't know what to do with that money anyway." The reality is that the Fed should have reversed its monetary overcontraction, and the federal government should have cut taxes or at least not raise them. Business owners and investors knew exactly what to do with their money: they'd expand businesses, creating new jobs and new wealth. Big government, though, enacted banking, business and labor regulations, and high taxes of course, that made it fruitless to invest.
And the New Deal still wasn't effective at all. The Depression got even worse throughout the 1930s, suddenly plunging in 1937-1938, and even most who revere FDR will say it was World War II that ended the Depression, not the New Deal (although that isn't quite true either). Keynesian-apologist bunk like this
blames the Depression's sudden worsening on a cut in federal spending. The claim is that FDR wanted a balanced budget. The raw data
shows that FDR's "balanced budget" had an 8% spending drop in 1937 compared to 1936 to 1937, and a 10% drop in 1938 compared to 1937 (17% overall). However, "tax receipts" surged 37% in 1937 compared to 1936, and then 25% in 1938 compared to 1937 -- an overall increase of 72%
. Yes, the federal government cut spending, but it was simultaneously raising taxes -- raising taxes a lot
. The top tax rate soared to 79% in 1936, after being raised to 63% in 1932. Massive spending cuts by themselves would have sufficed, but not with simultaneous tax hikes. The higher taxes and constrictive regulations simply discouraged businesses and their owners from doing anything profitable with money. Business owners could expand their businesses, but the after-tax income wouldn't be worth the increasing marginal cost. Would-be investors could save money, but who would borrow it? Government making it unprofitable to create wealth is why the Depression worsened, not because FDR wanted a balanced budget.
Ironically, as I mentioned last month
, FDR during the 1932 campaign criticized Hoover as taxing and spending too much. At the Foundation for Economic Education February Evening at FEE
, Dr. Richard Ebeling described how many free-market advocates would agree with what Roosevelt said prior to taking office:
He ran on a Democratic Party political platform that most people in this room, I would suggest, would have supported. He thought that the federal government was intruding too much in local and state affairs. The platform said that government spending had to be cut, the budget had to be balanced, and regulation had to be reduced. And that the United States had to be sound, upon a solid currency backed by gold. Of course, when he took office in March of 1933, Franklin Roosevelt began to implement policies that were exact opposite of that.
Today FDR is revered by many, considered by a lot to be one of the greatest presidents, and few (if any) of those people know what he campaigned on. He's revered because "he did something" when nobody else did. If the truth be told, he criticized Hoover's interventionism before engaging in the same practices. And as I showed, a balanced budget isn't intrinsically desirable, not when it requires tax hikes.